Merkel set for fourth term as German Chancellor

Germans go to the polls on Sunday in what is likely to continue Angela Merkel’s reign as head of Europe’s largest economy.

Léon

Cornelissen

Chief Economist

Speed read

Center-right CDU/CSU set to keep coalition with center-left SPD

Strong showing by euroskeptic FDP could unsettle markets

Far-right may sit in parliament for first time since WW2

Her reinstatement as Chancellor for a fourth term would be broadly welcomed by markets as continuing Germany’s steady-as-she-goes path, especially if the current coalition carries on. Merkel’s center-right Christian Democratic Union/Christian Social Union (CDU/CSU) remains ahead in the polls with a double-digit lead over their main rival – and current governing coalition partner – the Social Democratic Party (SPD).

However, the rise of the anti-euro Alternative for Germany (AfD) means Germany is on course to see a far-right party in the national parliament for the first time since World War Two. Minority parties must get over 5% of the vote to win seats, and the anti-immigration AfD is already polling above 10% of the total predicted vote. The main parties have already ruled out a coalition with it.

Meanwhile, the ‘dark horse’ may prove to be the liberal but somewhat euroskeptic Free Democrats (FDP). The party currently has no seats in the 598-seat Bundestag but has over 10% support in the polls, which means it may hold the keys to power. Other parties contesting the election are the Greens, who currently have 63 seats, and the far-left group Die Linke, who have 64.

Two viable coalitions

“The polls have been pretty consistent in predicting a CDU/CSU victory, which means Merkel will get her fourth and probably final term,” says Robeco Chief Economist Léon Cornelissen. “It now seems that there are only two viable coalitions with an overall majority – one between the CDU/CSU and SPD as before, or the ‘Jamaica coalition’ of the CDU/CSU along with the FDP and the Greens should the SPD emerge as too weak.”

The coalition got its name because the colors of all three parties taken together resemble the Jamaican flag. “However, this isn’t all that likely because of the large differences between the policies of the FDP and the Greens,” Cornelissen says. Such a coalition has never been tried at a central level, but can’t be ruled out.”

“The real worry is the AfD, as it would be the first time since the war that we’ve had the far-right at a federal level in parliament in Germany. Merkel covers the center in German politics, but now she’s facing a strengthening far-right. The CSU has always said it would ‘never accept a party to the right of us’, but that looks like changing. There has never been a successful euroskeptic party in Germany, but there are limits to how far the far right can go.”

Potential coalitions. Source: Financial Times/wahlrecht.de

Focus on France

Cornelissen says all eyes will be on how many seats the FDP ends up getting, and its resulting effect on future relations with French President Emmanuel Macron. The party is opposed to Macron’s ambitions to replace the International Monetary Fund with a European equivalent, along with his plans for a Eurozone budget. The party also supports Greece leaving the EU and the closure of the European Stability Mechanism which has helped with bailouts.

“The FDP is a natural coalition party for the CDU as they have successfully worked together in the past, and they also believe in lower taxes,” Cornelissen says. “Such a deal would be considered very business friendly and a boon for the stock market. But the FDP has a broader agenda that is more euroskeptic, which would make a future deal with Macron difficult.”

“It’s a kind of barometer for the strength of populism in Germany. A particularly strong showing for the FDP would unsettle markets for a while, as it would also force Merkel to be not that generous with France. However, the real euroskeptic party is the AfD, as they want a referendum on leaving the EU and the reintroduction of the Deutsche Mark. They’re the real threat.”

SPD on the backfoot

Such euroskeptic worries means the status quo may prevail, though the SPD has been losing votes following a poor election campaign by its leader Martin Schulz, Cornelissen says. “Schulz has promised to go to party members to get an agreement to continue the current grand coalition, and this could be particularly difficult because its support has been collapsing in the polls.”

“We could therefore even end up with a CDU/CSU minority government, though they would still need the support of the SPD in the upper house, and would have to deal with them in some way anyway.”

So what about the likely future of the Germany economy, still the largest and strongest in Europe? “In economic terms you can expect extra money for infrastructure and a lowering of taxes for households, which would be good for growth,” says Cornelissen.

“The German economy may experience some difficulties next year because of the strength of the euro hurting exports, and Germany is vulnerable to economic weakness in China, where the risks are on the rise because of China’s unsustainable rise in debt. All in all, we believe that growth in Germany will be in line with this year’s expectation.”